Treasuries gain for second day as U.S. spending reductions loom

Treasuries rose for a second day, with 10-year yields headed for the biggest weekly drop since September, as $85 billion of spending cuts that threatened to slow the world’s largest economy are set to be triggered.

Benchmark 10-year notes extended gains from February as President Barack Obama said after meeting with congressional leaders the reductions will be a “slow grind” on the economy. Treasuries had pared an advance earlier after a gauge of U.S. manufacturing rose to the highest since June 2011. Investors sought safety as Chinese factory growth slowed, the euro-area inflation rate dropped and Italian bonds fell.

“There’s a lot of paralysis going on in D.C.,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade Treasuries with the Federal Reserve. “It’s not clear yet on how it’s going to go, so people are buying Treasuries first and asking questions later.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.85 percent at 1:39 p.m. New York time, according to Bloomberg Bond Trader prices. It lost 11 basis points for the week, the biggest drop since Sept. 28. The 2 percent note due in February 2023 gained 7/32, or $2.19 per $1,000 face amount, to 101 11/32. Thirty-year bond yields declined two basis points to 3.06 percent.

Monthly Performance

Ten-year yields slid 11 basis points in February, their first drop in three months and the largest since July. They will be at 1.85 percent on March 31 before rising to 2.30 percent by year-end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

Treasuries trimmed gains after the Institute for Supply Management’s factory index advanced to 54.2 last month, from 53.1 in January, the Tempe, Arizona-based group said today. The figures exceeded the most optimistic forecast in a Bloomberg survey in which the median projection was 52.5. A reading greater than 50 signals expansion.

Commerce Department data showed earlier that consumer spending, which accounts for about 70 percent of the U.S. economy, rose 0.2 percent in January, matching the median estimate in a Bloomberg survey. Incomes slumped 3.6 percent.

U.S. government debt rallied this week after an inconclusive Italian election and as Federal Reserve Chairman Ben S. Bernanke backed the central bank’s bond purchases.